US Plans to Break China’s Grip on Rare Earths: Stocks to Watch

In early June, after arriving at a tariff framework that would favor China, President Trump prioritized to mention that “FULL MAGNETS, AND ANY NECESSARY RARE EARTHS, WILL BE SUPPLIED, UP FRONT, BY CHINA.” It has long been known that rare earth elements (REE) make or break a nation’s efforts to lead in both high tech and defense. China has dominance (up to 70%) in REEs, not just in global mining but in processing. So much so that the F-35 aircraft was reported to have 920 pounds of REEs originating in China. This puts the U.S. in an awkward geopolitical position, wherein its hegemony status relies on not upsetting China. The question is, how can retail investors leverage this contrast?

Why Are REEs the Next Oil?

In addition to scandium and yttrium, rare earth elements (REEs) consist of 15 elements, commonly referred to as lanthanoids. Although they are described as rare, REEs are actually more common than precious metals. For comparison, the crustal abundance of gold is 0.004 while copper is at 60 parts per million. This places the REE Cerium as more abundant than copper.

However, REEs and their magnetic, optical, and catalytic properties were discovered in the late 18th and 19th centuries. Moreover, they are not evenly distributed and often mixed with other minerals, making them costly to extract and refine. Yet, Central Asia is particularly rich in REE deposits which underscores China’s status in geopolitics beyond its role as the world’s manufacturing hub.

In a paper titled Leveraging Central Asia’s Rare Earth Elements for Economic Growth, the International Tax and Investment Center (ITIC) noted that:

“Advanced economies with secure, reliable access to REEs enjoy economic advantages in manufacturing and corresponding economic disadvantages accrue for those without this access.”

Up to 2023, China was responsible for 99% of heavy REE processing. From electric vehicles (EVs), smartphones, laptops, and solar panels to guidance systems, directed energy weapons, radar, satellite communication, jet engines, and smart bombs, REEs are simply irreplaceable.

Just two days after President Trump’s “Liberation Day” in early April, China responded with 7 heavy REE export restrictions, emphasizing its heavy leverage. The Center for Strategic & International Studies (CSIS) noted that “the United States is particularly vulnerable for these supply chains.”

However, the Department of Defense (DoD) took steps to rectify this vulnerability by having committed over $439 million in mine-to-magnet REE operations since 2020.

“We are on track to meet our goal of a sustainable, mine-to-magnet supply chain capable of supporting all U.S. defense requirements by 2027.”

DoD’s Danielle Miller in March 2024

Yet, the U.S. is decades away from domestic REE supply chains when it comes to the entire consumer electronics sector outside critical military needs. In the meantime, certain companies will be targeted to accelerate the process.

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Top Companies to Push REE Refinement Outside of China

Outside of China, Australian Lynas Rare Earths Ltd. (OTC: LYSCF and LYSDY) is the largest REE producer. In August 2023, the company’s U.S. subsidiary Lynas USA LLC expanded its relationship with the Department of Defense to construct a REE processing facility in Texas.

The aforementioned CSIS picked Australia as the main international U.S. partner, owing to the nation’s REE deposits in Browns Range, particularly for dysprosium, a key element in EV motors and wind turbine generators. Of course, Australia is also one of the nations in the Five Eyes (FVEY) intelligence alliance, which signals tight alignment with the U.S in all matters.

In addition to Lynas, Iluka Resources Ltd. (ILU.AX) invested $1.65 billion in government loans to establish Australia’s first REE refinery Eneabba in Western Australia in 2022, scheduled to be operational from 2027.

Both Lynas and Iluka shares surged on Friday, following the deal between DoD and US-based MP Materials (NYSE: MP). Californian MP runs the world’s second largest REE mine in Mountain Pass, which is the only such mine in the U.S. with the aid of downstream processing Independence magnetics facility in Fort Worth, Texas.

Ongoing REE Domestic Operations and Price Targets

On Thursday, MP announced a 10-year multibillion-dollar public private partnership (PPP) with the United States Department of Defense to build its second magnetics facility dubbed the “10X Facility” on a yet-to-be determined location. From 2028 onwards, the facility should reach 10,000 metric tons REE manufacturing capacity.

The price floor commitment for MP Materials’ products is $110 per kg of the NdPr alloy, consisting of Neodymium (Nd) and Praseodymium (Pr). With such a premium price floor, the company ensured positive cash flows for the foreseeable future. Of course, this premium signaled significance for Australian REE assets as well, boosting Lynas and Iluka shares in the process.

Year-to-date, MP stock is up 178%, surgeon 46% over the week, currently priced at $45.78 per share. However, the average MP price target is $32.90 according to WSJ forecasting data. At the moment, no analysts recommend selling, with 7 in the bullish camp and 3 for holding. MP’s price ceiling is $55 per share.

Lastly, Wyoming-based Rare Element Resources Ltd. (OTC: REEMF) should also be considered for REE exposure. The company’s main exploration and extraction operation is in Bear Lodge, having secured $553 million debt financing from the Export-Import Bank of the United States (“EXIM”) in March.

After testing, the company should start its Demonstration Plant in late 2025, with the expected production of up to 10 tons of Nd/Pr oxide/alloy. No doubt, this milestone will serve as another piece of bullish news for REEMF stock, which is up 152% year-to-date, but still in penny stock range at $0.96 per share. According to one analyst, the average REEMF price target is $1.61 per share.

Disclaimer: The author does not hold or have a position in any securities discussed in the article. All stock prices were quoted at the time of writing.